Innovation

I am looking for examples of public procurement models for tendering and cost reductions which have cost reductions and cost driver built into the RFQ process. Is anyone doing this and looking to use more private sector approaches to control costs and cost increases?

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Mike Horricks
The Ottawa Hospital (Ottawa)
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Reply

Hi, Mike. Maybe you’re looking for a more sophisticated solution, but I’ve been finding some success with a very simple method: cost share targeting. In the RFP, we ask for proposed share percentages, and then we shortlist based on the most favorable of those. I make sure the requirement already includes a very specific process for estimating (and negotiating) targets, so the shortlisting is a very fair process. Then the fixed share target becomes one of the few award criteria, and it’s established in the contract price schedule. From what I’ve seen, having share targets is the perfect disincentive to a contractor’s opportunism in generating cost overruns. A very simple formula would be to say that once the target is exceeded, the contractor’s profit goes to zero (while retaining the obligation to complete the work). Depending on the category, however, it’s usually better to include a sloped drop-off toward some percentage of overrun (construction projects, for example, should tolerate about 20% in changes). With this disincentive built into the price schedule, costs stay reasonable.

The tricky part is the process for estimating the cost target and negotiating something that both sides can abide. For some complex and high dollar procurements, I usually recommend the use of a third party for this sort of work. There are good and unbiased cost estimators available for most any type of work, and it’s not really a substantial price to pay for all of the opportunism that it saves.

I’ll be glad to expound on any of this if it’s what you’re after. There are a lot of interesting details and potential pitfalls that are worth discussing.